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by: Sahil | last updated: November 27, 2009
Category: Homeowners Insurance | Tags: Private Mortgage Insurance, Lenders Mortgage Insurance, tax deductible, tax
Category: Homeowners Insurance | Tags: Private Mortgage Insurance, Lenders Mortgage Insurance, tax deductible, tax
Private Mortgage insurance (PMI) is an insurance policy that compensates lenders or investors for losses due to default in payment or non-payment of the mortgage loan by the borrower. Private Mortgage insurance is usually required if the down payment is less than 20% of the price of the property. A Private Mortgage Insurance is also known as a Lenders Mortgage Insurance (LMI).
The annual cost of PMI depends on many factors such as the loan type, the loan term, the coverage amount, the frequency of premiums, and the proportion of the total home value that is financed. Once the principal is reduced to eighty percent of the value then no PMI is required to be paid. This can happen when there is an appreciation in the value of the house or when a principal is paid down.
In some cases the lenders will require that a LMI be paid over a fixed period of two or three years. This is regardless of the fact that the principal is reduced to 80% of the value. However, law lays down that there is no legal obligation to allow the cancellation of MI until the loan has amortized to 78% Loan To Value (LTV) ratio. The cost of mortgage insurance varies according to factors such as the loan amount, loan to value ratio, and your credit score.
If the borrower has a down payment that is lesser than 20% of the actual value then the option of going for a second mortgage is also open. However a second mortgage usually comes with a high interest rate since it is riskier compared to the first mortgage. This will mean that there are two loans – one with a down payment of 5% and one with 10%.
Mortgage interest was tax deductible; however Mortgage insurance premium were not tax deductible till 2007. In the United States Mortgage Insurance became tax deductible in order to provide easy access to homeownership. The deduction is applicable to homeowners who earn up to $109,000 annually (may vary). However it does not apply to mortgages that came into existence before the law was passed.
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